Here will be the place to ask questions regarding the Housing Crisis and what to expect in the future. I will endeavor to help all to understand what is really going on.

Much of what you are exposed to on the Internet, Media and other sources are filled with rumor, misrepresentations, falsehoods, and dis-information. The persons promoting the information have their own agenda, and have no wish for people to know the full story.

About me: I have been involved in the foreclosure crisis since Oct 07. I have a company that examines loan documents for litigation purposes. The examinations are not the TILA/RESPA crap that you hear about. Those "audits" mean nothing.

Currently, I am engaged in one action working with a bank, going after the lender that they bought bad loans from. This is typical of what I expect to do now, having gotten away from representing homeowners. I also have several products that are awaiting introduction into general usage with banks, after beta testing is done. One product is expected t revolutionize the Underwriting of loans, giving quantifiable risk analysis. A variation of this product will work with loan modifications and a byproduct of it will be used for Securitization of loans and risk analysis.

Feel free to ask questions, post articles, make comments, whatever suits you. I will try to reply with clear and insightful answers.

Right now, there are 7.1 million loans that are delinquent and which will likely default. Shadow inventory, that is bank owned, and both listed for sale and not listed for sale is perhaps another 2.1 million. That is at least 9.2 million homes either foreclosed upon, or at risk.

HAMP and other Modified Loans are also at risk. Of the 500,000 HAMP modifications alone, once the interest rate begins to adjust, five years down the road, most of those will default, if they haven't already. Likely, those loans will default much earlier since 75% of those have Debt Ratios greater than 50%.

Then, it must be added in the "future defaults" from homeowners with 5 or 7 year fixed adjustable rate mortgages. More defaults will occur due to the worsening economy. And Strategic Defaults will add to the deepening cesspool. Likely, a conservative number of total homes to default and then face being sold again is more than 12 million. (I believe that number to be more likely about 15 million.

The National Association of Realtors has been claiming about 4.8 million "sales" per year. It is now known that these numbers have been overstated for years and that it is more than likely less than 3.5 million. This number of sales consists of anywhere from 35% to 50% of foreclosures. The rest are "short sales", "organic sales" or new home sales.

Most people who are actively engaged in the foreclosure crisis, and without ulterior motives, believe that it will take 4-5 years for defaults to reasonably stabilize. Then, it will take several years, from 3-7 years, for inventory to be reduced. (A significant impact of this will be "pent-up sellers" who can finally begin to sell homes and "move up" to bigger homes". But this will be offset by Boomers who downsize.") Once inventory is stabilized, then we can expect a more normal increase in values of about 3.5%.

Unless hyper-inflation occurs, we are looking realistically at a decade or more to stabilize. Then, slow appreciation, but not reaching previous heights for a long period of time, if ever.

However, now for the "cold shower", if that was not bad enough.

Currently 95% of all loans are securitized through Fannie and Freddie or other agencies. The rest of the loans are portfolio loans, held by lenders. Private Securitization is pretty much non-existent until a purchaser can know what the risk is per loan. (One of my new products addresses just that issue.)

When Fannie and Freddie get privatized, which is needed, then there will be no more government guarantees of mortgages. This means that mortgage loans will be harder to qualify for, reducing the number of borrowers in the market for loans. Then, to attract investors, interest rates must rise, which will reduce borrower's buying power. When rates rise, home values drop. Only when values drop enough again, can the "priced out" borrowers return to the marketplace. (I expect at least 30% more of a drop in values, and maybe up to 50%.)

As you can see, things will not get easier for housing for an extended period of time. Just hope that my "expectations" are very pessimistic and things won't be so bad.

I am in the position where I have had contact with former FDIC guys who did the Good Bank/Bad Bank scenario in the 90's. As a result, I have a different view that others.

To understand, there are approximately 9000 banks in the US. On the FDIC "watch-list", there are claimed to be 884, give or take a few every month. These 884 are the most "carefully" watched, and could fail at any time. Now, here is the reality........

Almost 8000 of the total banks in the US have liquidity issues. In "normal" times, these banks would have already been closed. But, if the FDIC closes them, then the "ball game" is over.

When Bear Stearns was taken over in Mar 2008, that almost took the entire financial system down. When Lehman failed in Sep 08, you saw the effect of what happened. Everything immediately froze up.

Lehman was a "test" to see if multiple failures could occur, and whether the financial system could survive such failures. As we saw, it was likely that with more failures, the financial system would have completely collapse. (CD and I have "email buddies" who would contend that I am completely wrong about this. However, I trust the people that I have spoken with who are familiar with the actual actions of the FDIC at the time. Their opinions are that the government is doing the "best that they can", given the poor options available. See, I told you I have a different perspective.)

Banking in today's world is all about faith. Lose the faith, and we have nothing left.

Now, many people are wondering why banks who own certain loans do not do principal reductions. The answer again goes to liquidity. If they do a reduction, then that must go against loss reserves. Enough losses, the FDIC comes in and takes over the banks. (I was working with one former FDIC on a bank rescue project, doing Good Bank/Bad Bank. That was the problem we ran up against, even with small banks. We had to "recapitalize" the banks before the bad loans could be sold off, at 25-30 cents on the dollar. Not an easy process.)

BTW, part of the bailout went to other countries. For example, France had bought over $11 billion in MBS in different retirement holdings. Part of the bailout went to pay that back. Other countries had similiar issues that were addressed by the bailout.

My view (recapping) is that foreclosure is quite a good thing. It allows a financial mistake to get corrected. Hinder that and you hinder the process in the first place - of home ownership. Without mortgage what is the largest deduction, mortgage interest. Without foreclosure, what is the meaning of a lien against the property in the event of default.

Foreclosure (please correct me if I am wrong) involves a choice of remedies. When the lender successfully forecloses, takes title to the property, the borrower is released from the obligation they were unable/unwilling to pay. They may get a blemish on their record, but they no longer owe the money that they contractually agreed to pay. The lender gets back what is left from their mistake and the property gets a new family to move in and call home.

As a buyer of foreclosures, my bias in the value rollercoaster is mixed. 100% of my life savings is in R.E. so the runaway value episode was interesting like a fairy tale reminiscent of runaway tech stocks that had no revenues or profits. I would tell people who asked that rental homes were not 30% overvalued, they were 3 fold too high for their economic value. Unfortunately I was right. My average in Minneapolis foreclosures now is to pay 15 cents on the dollar of what the 2005-2007 buyer paid.

That said, I witnessed rundown properties bought at inflated peak prices where no one made any attempt after closing at renovation or move-in. If there was any investigation or law enforcement I believe we would find a criminal trail tying the players involved to a string of heists that landed on the taxpayer of the future.

As a landlord I get to hear the personal financial story of the applicants. One in particular touched me with sincerity. She was blaming no one for her foreclosure. She said she should have known her house payment would go from the $1100 to $1700 at the end of the end of the year, during a time of completely flat interest rates. She said it was probably in there (the loan document) somewhere and she should have read it more carefully. As anti-government as I am, I would say yes it should have been required on the top half of the first page in print as large as her name. Especially so considering that we find out that we are the guarantor of all these loans. I believe in the right of private companies to make promotions, but not to hide real costs, take their full compensation and leave us with garbage disguised as home ownership. - Comments?

I must agree with Doug that the foreclosures are a good thing. As they continue, then some sense of sanity returns to the housing market.

As to the homeowner you describe, the documents, especially the Truth In Lending Disclosure, did show how payments would change after a period of time. But people did not read the documents. Instead, it was sign, take the money or keys, and run.

The Option ARM borrowers were the most unrealistic and worst. I have asked many....."Seriously, did you believe that you would get a 30 year loan at 1%?" When I ask, they stutter and then try to fix blame elsewhere.

As to the "remedy" for homeowners, much depends upon the State Statutes. Some states are "Non-Recourse" states for Purchase Money loans. IOW, if the loan was for a Purchase, there there is no recourse for a deficiency judgement. However, if the loan was a refinance and cash was taken out, then that cash would be subject to a deficiency judgement. Additionally, if a second mortgage existed and was not paid off by the foreclosure, then the second could come after the homeowner.

For owner occupied homes, Bush passed a bill in Dec 07, whereby the IRS would not be able to make a claim on the deficiency. But it only applies to owner occ homes, and it will expire after 2012. Second Homes and Investments are not affected by the regulations.

Mr Mortgage, Mark Hanson has written up something regarding the "workout" that State AG's are attempting to negotiate with Servicers. I agree with all that he writes, especially about the Back End Debt Ratios. In fact, I pointed that out in Feb 10.

The BAC/Countrywide $8.6 billion settlement of 2009 — referred to many times during the current multi-agency mortgage servicing investigations — included ~400k borrowers, or $21,500 per loan. Therefore, the $20bb monetary fine being floated to potentially be used for principal reductions for four to seven million borrowers in the delinquency, default or Foreclosure process – $2.6k to $5k per borrower – is a proverbial ‘pee hole in a snow bank’. It’s only a few percent of what is really needed for an effective principal program, if there is such a thing. I would rather see the money used to buy and rehab condo complexes around the nation and give keys to condos, instead of general assistance checks, to the less fortunate to cover rent.

An apples-to-apples Robo-Settlement based on the BAC settlement would be $86 to $161 BILLION depending on how many were allowed to benefit. And still, reducing principal on every underwater borrower in the country by $21,500 would not do much. Add an Order of Magnitude to that and we are talking – but not even the Fed has a couple of trillion dollars lying around.

A $20bb settlement makes no difference to anything in mortgage and housing that is occurring, or set to occur. As an example of how small of a number $20bb is, new Notice-of-Defaults — the first stage of Foreclosure — in the state of CA totaled $9bb in January alone.

If this settlement – which not incidentally does include an extremely detailed and well-written servicer code of conduct – is accepted then I counter intuitively expect Foreclosure, short sale, and deed-in-lieu liquidations to increase substantially…far beyond what is considered ‘normalized’. This is because as the uncertainty that has been hanging over the servicer’s heads since Robo first broke in September 2010, which has resulted in a decrease of total legal default filings and Foreclosure completions by over 40% as of the end of February, is removed and servicer’s check their ‘conduct boxes’ off on each loan unit, there will be no uncertainty over liquidating when the hand book says it’s okay to do so.

2) Principal Balance Reduction Benefits are Overstated

As a career mortgage banker until 2006 — when it became blatantly obvious mortgage and housing was going to fall off a proverbial cliff and I left the industry to pursue other ventures – I am confident that the primary default driver has more to do with the back-end (total) debt-to-income ratios on the average legacy loan and loan modification being in the stratosphere than negative equity. In fact, on the average HAMP loan modification the median back-end DTI is ~65% of gross income. A household paying 65% of their GROSS monthly income to debt service each month — that can’t save, spend or vacation — is a massive credit risk, plain and simple.

Obviously, if a borrower has 20% equity and 65% debt ratios they can always sell making them less of a risk. But when you combine a high DTI and low to no home equity, it’s toxic. Even Subprime loans only had a maximum total Debt-to-Income ratio allowance of ~55% when they were originated during the bubble years.

A borrower at a 65% total debt-to-gross income ratio is a debt slave whether he is 50% underwater or has 5% equity in the house. There is no difference between the two. Neither can sell their house — pay their mortgage, pay the Realtor 6%, and put a 10% to 20% downpayment on a new house — and re-buy. Both are stuck.

Therefore, unless total debt-to-income ratios are taken considerably lower through long-term household de-leveraging – or complete household balance sheet modifications that target the back-end DTI (the only known way now is through Chapter-13) — no modifications will ever stick in mass.

3) What is to be gained through reducing principal balances on mortgages?

Nobody is asking the primary question in my mind with respect to principal reduction mortgage mods…What is to be gained?

The central planners making the rules will say ‘fewer people will default and go into Foreclosure’. We already discussed that negative equity alone is not a determining factor. Further, if a principal reduction plan was rolled out to the mainstream, then I suspect many would strategically default to take advantage of it. So, principal reduction mods to prevent loan defaults and Foreclosures are hogwash.

However, principal and ‘other debt’ forgiveness to ’unburden the organic homeowner allowing them to participate in the housing market again’ would be highly beneficial. But, of course, this isn’t a quick fix, as homeowners who received mortgage principal and other debt forgiveness could not turn right around and buy houses for various reasons. Further, there just isn’t enough capital at all of the top banks in the nation to bring balances down enough to make it effective. Lastly, demographics are not in the favor of the repeat buyer — especially at the mid-to-higher end of the market — as baby boomers that were such a vital part of the bubble from 2001 through 2007 are not moving up anytime soon. In fact, they are looking to downsize. I suspect that the next time repeat buyers have an outsized benefit on the housing market is when today’s first time buyers can move-up.

Remember, housing has a demand AND supply problem, which most don’t understand. In a normal housing market, the repeat buyer drives volume, followed far behind by first timers and then investors. In this market, the repeat buyer is by and large absent relative to historic averages leaving all the heavy lifting up to first timers and investors who want low priced properties, preferably Foreclosures, REO and short sales. Thus, anything that disrupts the flow of distressed real estate prevents a housing bottom and subsequent recovery.

There is just no way to easily or quickly unleash the organic repeat buyer or unburden them from their extraordinary leverage positions. Actually, the latter could be achieved by offering foreigners immediate US citizenship for the capital investment into residential real estate of at least $500k, but I suspect things would have to get really bad before an idea such as this was floated.

4) Real (Effective) Negative Equity is a much larger problem, as it pertains to housing, than mainstream reports suggest

CoreLogic came out today with their latest monthly negative equity figure of 11.1mm borrower’s with mortgages, or 23.1%. But this number doesn’t mean much to me.

What most don’t consider is real, or effective negative equity, as it pertains to repeat buying I touched upon in the item #2. Effective negative equity begins at the point at which the homeowner can’t sell the house and rebuy another, which requires paying a Realtor 6% on the sale and putting 10% to 20% down depending on the type of loan needed.

For example, on a Jumbo purchase in CA effective negative equity begins at 75% CLTV, which is the reason the Jumbo housing market continues to languish and will get worse. In fact, when you lower the CA Jumbo negative equity threshold to 75% CLTV, then 64% of all mortgaged homeowners are effectively underwater. This is also why I believe that Jumbo loans, a clear focus of banks and servicers with respect to modifications, payment plans and workouts for the past year and a half, have not even begun the pain stage that will ultimately come.

In lower house price states such as AZ and NV where it takes 6% to pay a Realtor and 10% down to move-up, down, or across, when you lower the negative equity threshold to 85%, even a greater percentage are effectively ’underwater’.

When national house prices fall another 10% to 20%, entire states will be consumed by effective negative equity putting even more pressure on real estate supply and demand fundamentals.

Bottom Line: Whether the borrower is at a 95% LTV or a 140% LTV, they are in an effective negative equity position. Then it all comes down to debt-to-income ratios. If I was a whole loan long-term investor, I would much rather own a 140% LTV loan on a borrower with a 40% DTI than a 95% LTV loan on a borrower with a 65% DTI. To the 40% DTI borrower, the LTV is an inconvenience. But, the 65% DTI legacy or modified borrower — even at 95% LTV – is trapped and not saving, shopping or vacationing, with few options available. After months or years of being in debtor’s prison, walking away and stripping down the house in order to sell the parts for security deposit and first months rent, moves way up the most likely list.

5) Where do we stand now?

In final, I am always asked about my predictions for total Foreclosures stemming from the bubble years. And I have said the same thing for years.

In short, there have been 3.5 million foreclosures and short sales to date stemming from legacy loans. There are presently ~7.5 million borrowers delinquent, defaulted, or in Foreclosure at present — grows by 100k to 125k per month — of which 75% to 80% will ultimately be liquidated. If another 7.5 million defaults — and modification redefaults — occur over the next three to five years then a total of 12 million to 15 million Foreclosure, short sale, and deed-in-lieu liquidations will occur, meaning we are now ~25% complete in cleansing the infamous 2003-2007 Bubble-Year’s toxic lending cesspool.

When the subject of MERS arises, there is guaranteed to be very quick and visceral reaction on the part of homeowner advocates. The reaction will be such that one would believe that MERS was the greatest evil ever perpetrated upon the planet. Next would come a demand that MERS be declared unlawful and any parties associated with MERS be thrown in jail. This is a shortsighted and narrow minded view which is based upon a lack of knowledge of the realities of securitization.

Prior to securitization and before the expansion of National Banks, the recording of deeds and later their assignments was a relatively easy process. That is because the entities doing the lending typically had branches in or near to the counties that they were lending. Furthermore, they did not have that significant of a volume of business. This made the process of recording deeds and assignments simple and effective.

Securitization would necessarily mean that a change to the process would have to occur. Securitized trusts could contain up to 8000 loans spread across 3,143 counties in the U.S. Most of these counties did not have the capabilities for electronic recording. Less than 700 have the capability today. Therefore, for effective securitization of products, local people would have to be hired and maintained on a daily basis to effect the assignments as necessary.

Assuming that a trust had 5000 loans in it, the following processes would have had to occur all within the time period of generally 30 days between the cut-off date and the closing date of the trust.

* The originating lender would need to complete an assignment of the Deed and have it notarized. It would need to be assigned to the purchasing lender. The entire loan package would then be delivered to the purchasing lender.

* The purchasing lender would need to cut a check to each recorder’s office, and then employ someone to take that deed and the check and have it recorded in the local county. Once recorded, the purchasing lender would then need to create a new assignment to the Sponsor of the trust. The loan package including the assignment would again be transferred to the Sponsor.

* The sponsor would have to cut a check to reach recorder’s office, and then employee someone to take that deed and the checking and haven’t recorded in the local county. Then the Sponsor would have to create a new assignment of the deed to the Depositor and then deliver the entire loan package to the Depositor.

* Now, the Depositor must cut checks, and then send the assignments out for recording to each county. When accomplished, since the Depositor has “established” the Trust, it must complete new assignments to the Trust, cut checks, and have everything recorded again.

The total process for the 5000 loans and four assignments per loan must be accomplished within the 30 days from the cut-off date to the closing date. Obviously, it is apparent that this cannot be done.

For securitization to occur, and remember that securitization provides up to 85% of the total dollar volume for mortgage lending, methodology must exist that will allow for the tracking of mortgage loan ownership in securitized trusts, and without the problems of attempting to record each and every assignment.

An entity such as MERS, or MERS in a different form is absolutely necessary to meet the demands of securitization. A separate entity should be established, private in nature, with no lender or banking ownership, and separate from the government. It should allow for the public tracking of mortgage ownership, freely and readily accessed through the Internet. By such a manner, the issues related to MERS and the controversy over foreclosure, and beneficiary status, can be eliminated.

I fully realize that many will take exception to this concept. However, if securitization is ever to be restarted, and the housing market to recover, such a standard practice must be implemented.

If I may chime in on the debate with a bit of an OT comparative question, or subjective opinion of an expert.

what do you make of Paul Krugmans fixation on Canada lately ? He seems to linken it to the american household debt problem and how financial stabilization wont fix much things, but portrays it as even worse ? Im a bit confused....heres an example http://krugman.blogs.nytimes.com/2011/03/04/oy-canada-2/

You continue to impress me: Not only is this in a language outside the language group of you native tongue, but it is some rather challenging material concerning the domestic political economy of another country. Even for Americans with a decent education (In my case, my father did real estate tax shelters in the 60s and 70s and I have my brief stint as a lawyer to help me understand) this material is not easy.

Concerning Krugman:

For most of us around here, he is considered a seriously confused economist, the Noble Prize not withstanding. For most of us around here, the Nobel Prize has lost much/most of the luster it used to have for us here in America; the recent progressive propaganda statement of giving Obama the Nobel Prize (and the audacity of him accepting it with so little to show for it!) being but the latest of such twaddle, including in the field of , , , lets say , , , economics.

Right now, in the conversation of our Political Economics there is a tremendous debate over the cause, meaning, solution of the Great Bubble Burst and what to do now. Krugman is of the Keynesian--Demand Side School of economics. In typical Keynesian logic he seeks to refill the balloon with deficit spending, guided by the government to its friends in labor and business. For me, this is a form of Economic Fascism. It is anti-American, anti-free market, and anti-Freedom (e.g. debt enslavement of our children) Others of us may call it other things, but the general attitude around here is the similar.

I've been in conversation with various Canadian friends, and read an interesting interview of the Canadian PM in the Wall Street Journal and would say that Krugman, being continuously disproven in his increasingly desparate assertions, now looks to the Canadian example to distract from the record of his commentary on the US economy. The Canadians certainly do have regulations that we do not, but they also have avoided the essence of the US mistake in a decidedly free market manner. They did not have Fannie Mae and Freddie Mac or a Community Reinvestment Act. They did not absolve the private sector from the losses that naturally ensue when one lends money to people who have no money of their own in the game and no ability to repay it-- instead relying only on continuing price increases to keep the party going. Our government did-- classic economic fascism, with classic real world consequences.

MERS is Mortgage Electronic Registration Systems (?) "simplifies the way mortgage ownership and servicing rights are originated, sold and tracked. Created by the real estate finance industry, MERS eliminates the need to prepare and record assignments when trading residential and commercial mortgage loans." http://www.mersinc.org/

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I am blown away by the (correct) answer to the 1099 question regarding debt cancellation. (There are exceptions always with the IRS and in the Debt Relief Act.) My (wrong) answer would have been no, you are also canceling the ownership of that asset and not writing off that offsetting loss. If I needed more deductions I think I would try to declare my losses in values as theft by swindle from the governing bodies of our economy - also not allowed. http://www.irs.gov/newsroom/article/0,,id=174034,00.htmlhttp://www.irs.gov/individuals/article/0,,id=179414,00.htmlHow does the IRS expect to collect from people not able to make a house payment?

IIRC there was something about the first born son in Exodus in the Torah, but BO et al and the IRS now seek the enslavement of ALL of our children to the debts of their fathers, imposed upon them by the Pharoah Baraq.

I follow a few foreign bloggers and op-eds for a while now. Ive added stratfor and a few others, that Ive seen from this forum, to the repertoire to get an even broader sense of the picture. Ive always disliked using only sources that prove my view on things. I chew it all, left right and cetre. Generally speaking, I like Project Syndicate, from Stiglitz, the most http://www.project-syndicate.org/

Ill leave Krugmans status for a different topic, but leave a few words on your input

Not to bump on this too much, I would only comment your "Economic Fascism" claim. Americas combined debt, this year included is almost 100% of yor GDP. Debt enslavement.... What the "Keynesians" of today claim is hardly Fascism, general idea is, that to jump start the economy, credits and raise in that debt by about 5% (some say 3%, some 7%, lets stick with middle ground) are needed to break level, to infuse the private sector investing again. Yes you would make your debt bigger, only by the smallest of margins, but the economy would start running. Which is the first step to do here, as I understand it is also the wisest. Not do that and the economy stays still, or even starts stagnating AND attempts at finding a solution are null.

b) We disagree substantially on Keynesianism, but this is not the thread for that conversation. I will grant that by itself Keynesianism is not economic fascism, but submit the proposition that it is being used by progressives for that purpose. I'm not sure to what you 3, 5, and 7% numbers refer,

c) "Yes you would make your debt bigger, only by the smallest of margins". Forgive me, but this is factually profoundly inaccurate.

d) The Stiglitz piece is mostly correct-- and quite unKeynesian I would quibble on this though:

Not quite. The reckless lending was multiplied immeasurably by the Federal Government, via mortage the guarantees of Fannie Mae and Freddie Mac, (and also the legal pressures to lend to the unqualified of the Community Reinvestment Act.) This is a fundamental point without which no analysis is complete. See the other housing thread nearby for extensive discussion of all this.

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"Securitization – putting large numbers of mortgages together to be sold to pension funds and investors around the world – worked only because there were rating agencies that were trusted to ensure that mortgage loans were given to people who would repay them. Today, no one will or should trust the rating agencies, or the investment banks that purveyed flawed products (sometimes designing them to lose money)."

Again, this leaves out the fundamental role of the Federal Government's Fannie Mae and Freddie Mac.

I thought that all might "enjoy" something about FICO Scores and loan approvals.

With Fannie and Freddie loans, the FICO Score and the Loan to Value are the "primary" considerations on loan approvals. All other factors are considered as "Contributory Risk Factors". They are assigned little importance. This is per the Fannie loan guidelines.

Now, consider this from Securitization Agreements.

FICO Scores May Not Accurately Predict the Likelihood of Default

The sponsor generally uses FICO scores as part of its underwriting process. The tables appearing in Appendix A show FICO scores for the mortgagors obtained either at the time of origination of their mortgage loans or more recently. A FICO score purports only to be a measurement of the relative degree of risk a borrower represents to a lender, i.e., that a borrower with a higher score is statistically expected to be less likely to default in payment than a borrower with a lower score. In addition, it should be noted that FICO scores were developed to indicate a level of default probability over a two-year period, which does not correspond to the expected life of a mortgage loan. Furthermore, FICO scores were not developed specifically for use in connection with mortgage loans, but for consumer loans in general. Therefore, FICO scores do not take into consideration the effect of mortgage loan characteristics on the probability of repayment by the borrower. Neither the depositor nor the sponsor makes any representations or warranties as to any borrower’s current FICO score, the actual performance of any mortgage loan or that a particular FICO score should be relied upon as a basis for an expectation that a borrower will repay its mortgage loan according to its terms.

So, Fannie and Freddie are approving loans based upon FICO Scores which are not relevant to mortgage loans. Go figure.............

And you wonder why so many loans default?

BTW, that problem is just about to be taken care of by a new product I am introducing in April. More on that later.

Housing starts fell 22.5% in February to 479,000 units at an annual rate, well below the consensus expected pace of 566,000. Starts are down 20.8% versus a year ago.

The decline in February was mostly due to a huge 46.1% drop in multi-family starts, which can be extremely volatile from month to month. Single-family starts also dropped 11.8% and are down 28.8% versus a year ago.

Starts fell in all major regions of the country.

New building permits fell 8.2% in February to a 517,000 annual rate, coming in well below the consensus expected pace of 570,000. Permits are down 20.5% versus a year ago with permits for single-family units down 27.0%.

Implications: The housing news today was not pretty. Starts fell very close to the April 2009 low, which is also the lowest level on record dating back to the 1950s. After spiking up sharply in January, multi-family units, which are extremely volatile from month to month, pulled back in February. Meanwhile, single-family starts also fell and continue to scrape along the bottom. Some of the February decline is probably due to unusually bad winter weather, which shifts builders away from breaking ground and gets them inside. Supporting this idea, home completions jumped 14%, and both single- and multi-family completions increased. In addition, anyone who has taken out a mortgage lately knows the lending process can be like torture. We still believe housing will normalize to much higher rates of both building activity and sales over the next several years, but unreasonably tight credit right now is slowing down that progress. Also, despite the weakness in February, the general upward trend in multi-family units remains intact. That should continue, in part due to tight credit but also foreclosures, as owners shift to renting. In other recent news, the Empire State index, a measure of manufacturing activity in that state, increased to +17.5 in March from +15.4 in February, a larger increase than the consensus expected. So while housing suffers, manufacturing continues to improve.

Sometime this month, the National Association of Realtors will be coming out with "restated" numbers of housing sales. For years, they have been "overstating" the number of home sales monthly. They got caught up with and are supposed to release more accurate numbers this month.

Interest Rate have now fallen below 4% again, and home sales are falling. Home values are falling as well. No one should consider buying in this environment.

BTW, when appraisals are done, the appraisers are only looking at "organic" home sales when possible. These are sales of homes that have not been foreclosed upon. Obviously, prices are "higher" than REO sales. Lenders, in order to keep up home values, don't want foreclosure sales to show on the appraisal because that would drive home values down further. This way, they can attempt to keep values propped up a bit.

7.1 million homes delinquent in payments at this time. 80% or more will be foreclosed upon. The worst is yet to come.

"No one should consider buying in this environment." - Ooops, made a buy yesterday. But I understand your point.

Going back a couple of days: "the FICO Score and the Loan to Value are the "primary" considerations on loan approvals. All other factors are considered as "Contributory Risk Factors". They are assigned little importance."

- Do you mean FICO and LTV are primary along with income verification, or is it possible to borrow favorably today with perfect credit and clear title, but not provide tax returns?

The Fannie and Freddie Guidelines state that Primary considerations are given to FICO Scores and to Loan to Value. Anything else is a "Contributory Risk Assessement". These are identified as Mortgage Term, Debt to Income, Liquid Reserves, Previous Mortgage Payment History, BK or Foreclosure, and Presence of Co-Borrowers.

Income Verification would be a part of Debt to Income. The income would be verified by use of Tax Returns, W-2's, Pay Stubs, or a written Verification of Income.

Notice that Debt to Income is a Contributory Factor only. This is absolutely absurd. It should be a Primary Factor.

Under the Fannie DU Approval System, a borrower can have Debt Ratios of 45% or greater. I have actually seen 67% approved for a Retired Couple, on a Full Doc loan. The 67% was allowed because the borrowers had Equity in their home, and could have presumably refinanced at some point and paid off significant consumer debt, when they ran into trouble. There was no way that the particular loan should have been approved at those Ratios.

Now for the good news.

For 3 1/2 years, I have been reviewing loan files. During this period of time, I have discovered the Primary Indicator that indicates the likelihood of default. I call it the "Y Variable". This indicator, with two other variables that either support the Y Variable, or show "behavior" that would lead to default, provide the foundation for what I have introduced to one bank, and starting in April, will hopefully lead to acceptance across the lending industry. The product is a new way of evaluating Default Risk in a mortgage loan. Using this information, and the Y Variable, I can quantify "Risk of Default" in individual mortgage loans. This has not been able to be done before. (Validation Studies using Fannie loans, good and in default, support the Y Variable.)

The result of this methodology will be to make loan approvals harder to get. But it will cut down on default risk and can provide the purchasers of loans a true ability to determine the risk in each loan. With this, and other factors in the methodology, this could restart loan securitization.

Existing home sales fell 9.6% in February to an annual rate of 4.88 million, well below the consensus expected pace of 5.11 million. Existing home sales are down 2.8% versus a year ago.

Sales in February were down in all major regions of the country. Sales declined for both single-family homes and condos/coops.

The median price of an existing home fell to $156,100 in February (not seasonally adjusted), and is down 5.2% versus a year ago. Average prices are down 2.7% versus last year.

The months’ supply of existing homes (how long it would take to sell the entire inventory at the current sales rate) rose to 8.6 from 7.5 in January. The increase in the months’ supply was mostly due to the slower selling pace. Inventories also increased slightly.

Implications: Existing home sales pulled back in February, after increasing substantially in the past three months. Despite overall economic improvement – including higher wages and more private-sector jobs – credit conditions remain a major headwind for home sales. Anyone who has taken out a mortgage lately knows the lending process can be brutal, even for those willing and able to make a down-payment of 20%. By contrast, rental vacancies are falling fast. We are not concerned about the small rise in inventories in February. Inventories normally rise in February, as the spring selling season approaches, and are still down 1.2% compared to a year ago. Although the data will zig and zag from month to month, we expect the sales of existing homes to eventually reach the long-term trend of 5.5 million units annually. With housing affordability at the highest level in at least 40 years, the market for homes is poised to improve.

1. He is quoting NAR statistics. These statistics are completely unreliable. They are considered about 1m overstated. (Ever met a Realtor who didn't lie about how good they were doing?)

2. Home sales are dropping, and not increasing.

3. With regard to Inventories, he neglects the 7.1m homes delinquent on their mortgage payments. This is "shadow inventory" that will come to market this year and next. Furthermore, the inventory he quotes is based upon MLS. The non-listed REO drive this number up considerably.

4. Only buyers are first time homeowners and investors. There are few move up homeowners because they cannot sell their homes due to the underwater status. First time homeowners who can qualify for homes are being severely depleted.

5. Loan standards are such that guidelines for income verification are back to 1980 standards. Unfortunately, Fannie and Freddie are still allowing purchases and refinances at 45% or greater DTI, based upon the Fannie Automated Approval Systems. This will change because those borrowers will eventually default at those levels of DTI.

6. Home values are going to drop at least 20% more, and as the economy double-dips, this will get worse.

Without the assist from a recovery in the housing market that usually occurs after a recession, the economic recovery remains “extremely fragile,” he said.

The housing slump poses a major obstacle for consumers and homeowners because the biggest home-price drops since the Great Depression have cut into their main source of wealth and made it difficult or impossible to refinance, sell homes or even move from one place to another.

Huge price drops ranging up to 60 percent in some distressed areas of the country also increase the likelihood that more people will end up defaulting on mortgages that are worth far more than the homes they finance and that homeowners can no longer afford to pay, economists say.

“The trajectory of home prices has tremendous economic significance” because it could lead to more defaults and undermine the financial system, said Peter Schiff, chief executive of Euro Pacific Capital.

He is predicting that home prices will fall another 20 percent on average, prompting a new rash of mortgage defaults that he said “could produce losses that overwhelm banks and trigger another, deeper financial crisis.”

From what I recall about Wesbury from Gilder days was that he is alwas a bull.

If my memory is correct he was completely wrong about the tech crash.

I also recall one of the penny stocks recommended by Gilder who got the idea from Brian and then added it to his letter had in Wesbury listed as preferred stock holder of a large amount of shares. This was not disclosed by Gilder or Wesbury. Unethical for sure.

In some ways Webury reminds me of Larry Kudlow. Endless jibberish, endless bull market speak, and like all advisors getting very wealthy selling advice to those that lose money listening to them.

Like Steve Forbes said on a Rush Limbaugh radio show around 1998, his father taught him you can get a lot richer selling market advise rather than following it.

Meandering on a few points raised...------------Wesbury is excessively bullish but I don't share the negative view of him. Maybe it's just lower expectations but I only hold the economists to their explanations of what has already happened. I think economists like Wesbury and Scott Grannis track the best data that they know. The NAR objective is well noted, but in many cases they are tracking or making better adjustments than the so-called real professionals (like the Fed). I learn a lot from the charts, but future based statements are by definition about an unknown. The optimists didn't see crashes coming and the pessimists saw it coming 5 years too soon. -------------

Un-mortgaged Properties?

I saw a local television news piece on percentage of mortgages underwater that led me to a question. They said at one point "percent of mortgaged property", which begs the question, what percent of American single family homes are not mortgaged (that are left out of these percentages)?______________

R.E. market still dropping? Yes, more than it needs to.

Comment/question regarding the people behind on their mortgages right now: All these foreclosures coming certainly make a large downward force on prices. That said, the number of houses coming onto the market and the number families in need of a home coming onto the market make up something like a one to one ratio. Certainly some younger people and some older people will end up moving in with family, but generally speaking, a foreclosure separates a family from a house. The house needs a new owner and the family needs a residence. Both the house and the family re-enter the market as slightly damaged goods. What I am getting at is the magnitude of the negative effect has a lot to do with the economy otherwise in terms of income and employment and the inefficiency of this process of turnover.

As a landlord I benefit from these families re-entering as renters. The buyers of the foreclosures find the homes with the furnace sometimes stripped out, sometimes with the whole kitchen stripped out, a heaved sidewalk, roof leak, etc. The bank-based property owners like FNMA amaze me with what they are not willing to do to prepare a property for a retail sale. Buyers of foreclosures, I can tell you, are exhausted and I mean that in two ways. No matter how much money one started with, the funds are used up after three years of buying opportunities. If they want to re-sell damaged goods to turnaround artists at this late date in the cycle, they should offer funding based on a track record of successfully turning around properties, without strict adherence to conventional requirements of loan qualification. Frankly, for those of us who reinvest everything into deductible repairs are not going to be showing good income on the 1040 during the intense turnaround years. Instead damaged homes can only sell for cash because they can't immediately pass inspection for homeowners insurance or a mortgage. Meanwhile nearly 100% of residential homebuilding workers are unemployed, collecting their only income from some other branch of the government and not rebuilding the homes. There is a deplorable lack of curiosity and effort from all directions of how to solve any of this IMO. Comments?

----------------

Housing is an Investment?

pp wrote: "Essentially, the cost is Real Dollars today is equal to the cost in 1890...Housing is an "Investment"? I don't think so................"

Agree! It is a depreciating asset. A quarter century later my house is 25 years older in the same location with the same view. And houses are highly taxed assets. Especially the home you live in is not an investment - it is largely a cost of living. The principle you buy down on your mortgage might be like a forced savings plan, but very inaccessible, unless you keep borrowing, defeating the whole purpose. Rental property has rental income, perhaps. The 'appreciation' is inflation. Then you get taxed on it. The capital gains tax on the inflation is going up federally by 60% just under Obamacare, not counting the increases postponed by the last budget deal. Plus states tax your gain as ordinary income, and you can't move the property with you out of the high tax state. The exclusions on principle residence have limits as well, only 250k if you are single. In the high end properties (or in hyperinflation) that becomes less of a protection from taxation on sale.

NAR is completely unreliable. They are a marketing firm for all purposes, promoting home ownership. They misrepresent the current status of the market to suggest a recovering market, when one does not exist.

As to unencumbered properties, 1 in 3 homes have no mortgage.

"Real Estate Market still dropping....more than it needs to". Sorry, but I totally disagree, at least in the major markets. Most people today cannot qualify for a mortgage. This is because prices are still far to high. Prices need to fall further, to more sustainable levels, and to bring people back into the market, by being able to qualify for a loan.

Furthermore, loan qualifying standards are still too loose. Fannie will qualify people up to 65% Debt Ratios, with certain compensating factors. I can show time and again that the compensating factors will not alleviate the risk of even a 45% Debt Ratio, needless to say a 65% ratio.

You mention the 1 to 1 factor of people needing homes, and those coming to market. I don't know where you live, but here in CA, that is completely off.

Right now, there are 16m total empty units of housing. This includes rentals, for sale, and apartments. There are 7.1m more people deficient in their mortgages. 1m REO properties are believed to exist that have not been listed. Where are all the people for these empty units? We are seriously overbuilt.

To solve the problem of housing in the US, there are certain facts that must be accepted.

The right to own a home does not exist, no matter what the government believes.

There are large numbers of people who will never be able to afford a home, and they should not be "offered" a program where they can buy, and then lose the home.

Excellent segment on "freeloaders" by John Stossel yesterday. I think it will likely be replayed over the weekend. I only post here because part of it deals with "freeloaders" who get out of their mortgages without paying a cent. They simply don't pay for several months and get to walk away. He interviews one guy whose house lost value below what his mortgage amount was and simply walked away. He shows another lady who found some sort of loopholes to stay in her house for 20 yrs without paying any mortgage. Businesses are making money teaching people how to screw the banks (and all of the rest of us who do pay our mortgages) over. So what else is new?

"You mention the 1 to 1 factor of people needing homes, and those coming to market. I don't know where you live, but here in CA, that is completely off."

pp: What I was trying to say was that after we accept that there is already a huge number vacant homes in America, each new foreclosure releases one additional house to the market and one additional family to the market. Each additional house foreclosed will tend to drive the prices down, but the family still needs to rent, buy or move in with family; they are still some part of demand for housing. In other words, it is a net loss to the housing market, but not a total loss. People foreclosed in the third (fourth?) year of this are underwater but not necessarily unemployed, hopeless or even with terrible credit except for this one new foreclosure. They will be moving down in the market but not completely out. Did that make any more sense?

EXPERT COMMENTARYDouble Dip in Housing Could Be Imminent, Scholar Says By Anthony B. Sanders Mercatus Center Senior ScholarU.S. home prices for the month of January fell 3.1% from year-ago levels, according to the S&P/Case-Shiller composite 20-city home price index — a barometer for national home prices.

There is definitely a chance that a double dip could occur in housing, given that recent data show little support for housing. (See this graph.) If interest rates begin to climb, that could be the tipping point for the double dip.

Notice that progressive interest rate declines have done little to stimulate housing demand. That is similar to the “liquidity trap” where asset demand is unaffected by lower interest rates. That could signal the end of quantitative easing by the Fed.

Even without Interest Rates increasing, the Double Dip is in. If appraisals were using foreclosures sales, instead of organic sales, and that the comps were being "cherry-picked", then it would be obvious that the Dip was here.

As it is, the only reason there was any "recovery" in housing last year and the year before was the government incentive to new buyers.

With the inflation to come, much will depend upon whether family income rises with the inflation. If income does not rise to match inflation, then housing will continue to suffer. Inflated home prices would mean that home buyers could afford even less home for their money.

At this time, home values are at least 30% over valued, and likely 50% in some areas. The majority of people cannot afford to buy homes, due to lack of income. So, how could increased home prices be good?

By the way, I had time finally to fully review the new regulations for underwriting as proposed by the government regulators. The new criteria is based primarily upon two factors.. Loan to Value and Credit History. Here are the key points.

Fannie and Freddie LoansLoan to Value for Purchases - 80% maximum.Rate and Term Refinance - 75% maximumCash Out Refinance - 70%No more FICO ScoresMust be current on all outstanding debt.No 60 days lates in the past two years.28/36% Debt Ratios. Can go up to 41% with "compensating factors".No Risk Retention by lenders

Fannie and Freddie are trying to "cream" the loans. They will only take the "best". They do admit that under their guidelines, many "good" borrowers will go wanting.

What is wrong with their program:

FICO does serve some purpose. It takes into consideration factors other than just Credit History. The factors that the new guidelines ignore are actually more important that just history.The guidelines do not mention 30 day lates. A borrower appears to be able to have numerous such lates with no adverse effects.Loan to Value in declining markets is not considered.Debt Ratios have an inherent problem built into them, that is not considered.

What is amazing is that the new guidelines state that "contributing factors" to default will not be "integrated" into their models. That is because it is too "complicated" and costly to do so, and also that doing so would mean necessarily changing the algorithm as the factors change. This is exactly what my new Loan Default Risk Model is designed to do.

All other loans would have to be held in a lender's portfolio, or privately securitized. Since lenders cannot lend at this time due to liquidity issues, and there is no private securitization, essentially all that is left is either a borrower to be placed into FHA loans, or to not get a loan.

If private securitization is restarted, then a lender must retain a minimum of 5% risk in each loan that does not meet the above standards.

The reality is that the new regulations are a "power play" by the Agencies to continue to control the housing market.

Nevada suffered a 9.9% Year over Year decline in Home Values, according to Corelogic. This was for Feb 2011.

From what I hear, whole sub-divisions remain empty in the LV area. People will not buy because of the lack of neighbors. It is just as easy to buy in the new sub-divisions, and have neighbors, and a new home.

Foreclosure completions are still lagging behind as compared to homes in deficiency status. There is a large "Shadow Inventory" as well as what is on the MLS.

In other words, home values will continue to fall. The bottom is not in yet.

Victoria Pauli signed a one-year lease last week to stay in her rental home in Fair Oaks, California. She had considered buying in the area, where property prices have slumped 57 percent since a 2005 peak.

In the end, she decided it wasn’t worth it.

“I know people who have watched their home values get cut in half, and I know people who are losing their homes,” said Pauli, 31, who works as a property manager for a real estate company. “It’s part of the American dream to want to own your own home, and I used to feel that way, but now I tell myself: Be careful what you wish for.”

The most affordable real estate in a generation is failing to lure buyers as Americans like Pauli sour on the idea of home ownership. At the end of 2010, the fourth year of the housing collapse, the share of people who said a home was a safe investment dropped to 64 percent from 70 percent in the first quarter. The December figure was the lowest in a survey that goes back to 2003, when it was 83 percent.

“The magnitude of the housing crash caused permanent changes in the way some people view home ownership,” said Michael Lea, a finance professor at San Diego State University. “Even as the economy improves, there are some who will never buy a home because their confidence in real estate is gone.”

Not sure that I agree with the conclusion of this, but if seems to discuss relevant issues:

S&P and the Lehman Tsunami The breakdown of the world financial system was not due to faulty rating agencies.By HOLMAN W. JENKINS, JR. WSJ

Though it may seem a frivolous question, just how bad were the Standard & Poor's ratings that have been implicated in the financial crisis?

In its complaint filed this week, the Justice Department accuses S&P of fraud, or deliberately misapplying its rating criteria. But aside from naming a handful of highly-rated collateralized debt obligations (bonds derived from other bonds that were mostly backed by mortgages) that quickly defaulted in 2007, the complaint never explains what makes a rating good or how to know when ratings are defective.

A paper last year by Philly Federal Reserve economists estimates that 727 CDOs issued between 1999 and 2007 with a face value of $641 billion have or eventually will suffer writedowns of $420 billion, or 65%.

That sounds awful, but, as the authors note, writedowns aren't the same as actual losses.

Banks were required by mark-to-market accounting to record huge losses when their holdings became unsalable in the panicked market. When rating agencies began downgrading the securities, banks also had to record losses. Though some like Merrill Lynch experienced actual losses by selling into the maelstrom, they did so knowing they were accepting firesale prices from buyers who expected to make a killing.

Even saying a CDO defaulted doesn't tell you what the ultimate recovery was. Liquidations happen as result of a vote in which the senior classes (which expect to get most or all their money back) put the screws to junior classes which may prefer to wait until underlying markets recover.

So a mystery lingers. Structured vehicles are called structured for a reason, creating highly-rated bonds out of low-rated collateral by setting up junior tranches to absorb any losses and protect the Triple-A tranches. How did this work out?

Thanks to the AIG and Bear Stearns bailouts, the New York Fed acquired large holdings of these securities at what were undoubtedly generous prices amid the crisis. Yet the N.Y. Fed still managed to sell them later for a profit, to buyers who presumably anticipated still further recovery.

The government's own Financial Crisis Inquiry Commission concluded in its final report: "Although this could not be known in 2007, at the end of 2010 most of the triple-A tranches of mortgage-backed securities have avoided actual losses in cash flow through 2010 and may avoid significant realized losses going forward."

This is not to exculpate the rating agencies. But certain savants who are genius at picking apart and decrying in retrospect the "toxic" potential of CDOs overlook a bigger picture. Whatever the meaning of "Triple-A," it was clearly disastrous for banks to assume such securities would always be liquid and therefore could be safely held with large amounts of borrowed money. But this only was the starting point for a global panic.

International trade didn't contract more sharply than it did in the 1930s because people in Thailand and Australia and China who engage in trade were underwater on their Stockton, Calif., mortgages.

Households and businesses around the globe did not curtail spending overnight because of faulty subprime ratings.

House prices did not plummet and defaults spike far from the subprime hot zones because of something S&P did.

S&P was not responsible for the destruction of underlying housing collateral by politicians who made it nearly impossible to foreclose on delinquent homeowners.

These bad effects were not the product of dodgy ratings. They were political and economic consequences of the post-Lehman panic. Indeed, the post-Lehman panic may have done more damage to housing values than housing values did to trigger the Lehman panic.

As Ben Bernanke himself later testified, "You know, the stock market goes up and down every day more than the entire value of the subprime mortgages in the country." Until Lehman, recall, housing and employment held up remarkably well in most of the nation despite 18 months of subprime turmoil.

Rating agencies have always been ratifiers of whatever the market thought about a particular instrument at the time the market thought it. Ratings may be a lame underpinning of a dysfunctional system but they didn't turn a regional housing correction into a global crisis. The fatal factor was a widespread reliance on governments to gin up the printing press to make sure money claims on large financial institutions would always be honored. When that assumption was questioned in the middle of the subprime correction, only then did the economy come unglued.